Advantage Energy Q1 2024 Earnings Call Transcript

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April 26, 2024

There are 4 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to ADDvantage Energy First Quarter 2024 Results Conference Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for a question. I would now like to turn the conference over to Brian Badmall, Director, Commodities and Capital Markets.

Operator

Please go ahead.

Speaker 1

Thank you, Jenny, and welcome everyone to Advantage's conference call to discuss our Q1 2024 results. Before we get started, I'd like to refer you to the advisories on forward looking statements contained in the news release as well as the advisories contained in ADDvantage's annual information form and the MD and A, which are available on SEDAR and on our website. I also draw your attention to the material factors and assumptions in those advisories. I'm here today with Mike Balenke, President and CEO of ADDvantage Craig Blackwood, our CFO as well as other members of our executive team. We'll start by speaking to some of our financial and operational highlights.

Speaker 1

And once Mike and Craig have finished speaking, we'll pass it back to the operator for questions. I'd just like to note, while we're happy to answer your questions, we'd ask that if you have any detailed modeling questions that you follow-up with us individually after the call. Mike, please go ahead.

Speaker 2

Thank you, Brian. I'm pleased to present results from the Q1 of 2024. I'll start with some of the high points and walk through what to expect from the company next. The Q1 of 2024 was mostly about continued strong operational performance, in particular from our new wells at Glacier. Our production remained around record levels and we were also able to expand our Tier 1 drilling inventory by drilling wells in areas that had not been developed using our updated technology.

Speaker 2

As a result of exiting 2023 with net debt that was below the bottom of our target range, We were able to enhance our shareholder returns by continuing to buy back shares countercyclically. Highlights from the quarter included adjusted funds flow of $67,000,000 for Avenge, while capital expenditures were $76,000,000 Net debt fell into the middle of our debt range at 233,000,000 dollars We repurchased 2,400,000 shares during the quarter, which is 1.5% of our outstanding share count at an average purchase price of $8.86 returning $21,000,000 to shareholders. Operationally, our performance was very positive with first quarter production over 66,000 beauties per day. This is an increase of 18% per share over the same quarter last year. Liquids production increased to 6,452 barrels per day, which was an increase of 17% per share over the Q1 of 'twenty 3.

Speaker 2

And we've officially filled the Glacier gas plant with 425,000,000 cubic feet per day for sustained periods during the quarter. It's particularly important to note that our owned and operated infrastructure performed very reliably during periods of extreme cold this winter with only modest throughput reductions on the coldest days below minus 40. We weren't quite as fortunate with our 3rd party gas plants at Wembley where there were modest impacts to production at our earliest asset due to unplanned outages. Highlighting some drilling results. At Glacier, our 2 most recent wells averaged P30s of 15,000,000 cubic feet per day per well, which is well above type curve, perhaps 40% above type curve.

Speaker 2

This is particularly important since these wells help extend our Tier 1 inventory bookings further south into the asset, which was acquired only a few years ago. As a result of the continued outperformance of the entire drilling program, we now have 3 wells fully drilled and completed, but shut in because production remains above plant capacity. With gas prices in North America currently suppressed, Advantage is also excited to be in the process of drilling a 3 well pad at Wembley targeting 2d4 wells and 1d3 well, which typically have initial liquids ratios of about 65%. These wells are expected to come on stream by early in Q3. And although there have been reports of water shortages in Northwest Alberta, Advantage has stockpiled enough water to execute the remaining portion of our program through the Q3 and we don't anticipate any impacts to our ability to execute the full year program.

Speaker 1

Looking forward,

Speaker 2

with elevated North American gas supplies in an unusually warm winter, North American gas prices remain suppressed and this is expected to continue through the summer. Part of the reason for this oversupply is the necessary ramp up in production in advance of structural demand growth in North America, which includes demand growth from LNG Canada and LNG projects on the Gulf Coast. As usual, AECO was most sensitive to oversupply dynamics, so Advantage is pleased to have minimal exposure to AECO this summer at only 8%. As LNG projects start to enter commissioning and structural demand increases later in the year, balances are expected to improve substantially, which is reflected in the forward strip currently showing strong in Panko. We're currently navigating and optimizing our program to manage near term volatility, but focused on long term value.

Speaker 2

Advantage continuously reviews our capital program, evaluating each discrete investment at the most current strip pricing possible in advance of those investments. Each investment is judged using a simple comparison. Will shareholder returns be highest by growing cash flow or by allocating that same capital to our share buyback program instead? Since these decisions can be made on a well by well basis, significant discretion remains in our 2024 capital program. In addition to that agility and perhaps more importantly, we continue to benefit from the outperformance of our drilling program.

Speaker 2

And as a result, there is an increasing likelihood that advantage may need fewer wells this year to achieve our production targets. This may lead to our 2024 capital being reduced further below our current midpoint of $235,000,000 without having to reduce our production expectations for the year at all.

Speaker 1

And this is on

Speaker 2

top of the capital reductions that we announced only a month or 2 ago when our midpoint of capital was reduced from $275,000,000 to $235,000,000 So there's a possibility of that falling further still. Development of our Progress gas plant remains on track with commissioning anticipated by mid year 2025. To maximize shareholder value, we remain focused on growing cash flow per share, while maintaining a net debt target of between $200,000,000 $250,000,000 Our 3 year plan remains to deliver compounded cash flow per share growth via disciplined capital allocation with annual spending in each of those years ranging between $220,000,000 $300,000,000 noting that our range for this year is $220,000,000 to $250,000,000 currently. Our production growth target remains capped at 10% per year. Contrary to the near term oversupply, we believe 2025 may be undersupplied and rebalancing of the markets will likely take between 1 2 years after that.

Speaker 2

Based on current futures pricing, the advantage estimates capital spending will average approximately 75% of AFF for 2024 and 2025 and all free cash flow will continue to be used for share repurchases. With our modern low emissions intensity assets, decades decades of top tier inventory and our majority ownership of Entravy, which by the way continues to advance quite nicely, hopefully we'll have more to talk about in the coming months. Advantage continues to probably deliver clean, reliable, affordable energy and helping to contribute to a reduction of global emissions by displacing higher carbon fuels. We'd like to thank our employees, our board and our shareholders for their ongoing support. We'll turn it back over to Brian for questions now.

Speaker 1

Thanks, Mike. And Jenny, we can go to the phone lines. Thank you.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Your first question is from Chris Thompson from CIBC. Please ask your question.

Speaker 3

Yes. Good morning, guys. Thanks for taking my question here. At Glacier, you mentioned those new wells are 40% above type curve. I'm just wondering what did you do differently that's driving that outperformance?

Speaker 3

Is it purely reservoir or was there something in the drilling and completion design that you changed?

Speaker 2

Yes. Thanks for the question. As with most things in nature that are drastic changes, it requires a combination of many different factors. So I would sort of summarize without being too specific about certain competitive approaches that we have, I would summarize it's in the way that we drill them, the location we drill them in, the rock quality itself, the way we steer them together with them being longer with a different frac design than we used to have and higher frac intensity. And that's also added to the fact that to produce at these high rates, we require a bunch of very unique surface facility design work as well.

Speaker 2

And of course, lastly, pipeline and plant capacity. So the team has been doing a great job of looking at dozens and dozens of different factors to make sure that every one of those things lines up and allows these outlier wells to continue to happen. And so we do think that this will continue across the asset. This is not unique to one area. We've seen these types of results all around Glacier and for that matter across our other assets as well.

Speaker 2

Hopefully, that answers your question. Okay. Thanks for that. Yes.

Speaker 3

And then on the wells being shut in, you're waiting for kind of your base production to decline at Glacier and then these wells get brought online. What is the cadence of drilling then now that Glacier is full that's required just to keep it full at this level? And I guess once progress comes online next year, how much space will that open up for you potentially at Glacier?

Speaker 2

Yes, sure. Thanks for the question. So, 1st and foremost, it's not just the last 2 wells that are overproducing versus expectations. It's been pretty much our whole program. So, Mayo's wells have not just come on at higher rates, but also have declined more slowly.

Speaker 2

And that has created a sort of a bank of production, which those 3 wells are essentially now surplus deposits. So, we'll wait for the rest of the system to continue to decline naturally. And as the system declines, we'll feather those wells in to make sure that we remain essentially full. And we're happy we happen to be fortunate right now and we're drilling just Wembley wells as we speak and then it's breakup. So spring breakup, we lay down all of our equipment.

Speaker 2

There'll be a gap in new wells. And the only question for us is how early for us to restart the drilling of wells in the Q3 or late in breakup. So some of the work that's going on right now and the reason why we're not able to actually be specific around the potential for capital reductions is because the team is analyzing how much, if at all, we should be slipping the reactivation of our drilling equipment after breakup. And so more to come on that. It'll take us a little while, probably won't have any announcements until within the next month or 2 on capital, but the analysis will allow us to tell you how much later we start and how many fewer wells are required to hit our targets.

Speaker 2

Okay. Thanks. And then

Speaker 3

on the progress, just like how much capacity did that open up for you at Glacier?

Speaker 2

Yes. Thanks. Sorry about the second part. So Progress is a 75,000,000 cubic feet per day gas plant, which is under construction. That's expected to come on in roughly the middle of the year, perhaps slightly earlier next year.

Speaker 2

And what Progress does is it actually eliminates it doesn't create new capacity for the Valhalla Progress asset. It simply takes the Valhalla and Progress production out of where it's currently being processed at Glacier. So we're doing is instead of expanding Glacier again, we're creating another gas plant, which takes production away from Glacier, creating that space. So we're creating 75,000,000 cubic feet per day more space at Glacier. And that will allow us to continue to grow obviously the flagship assets next year once that plant has been turned on.

Speaker 2

Okay. Thanks, Mike. I'll hand it back. Thank

Operator

you. There are no further questions at this time. Please proceed.

Speaker 1

Great. Thank you everybody for joining

Speaker 2

and we'll catch up with many of

Speaker 1

you soon. Thank you. Thanks everyone.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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Earnings Conference Call
Advantage Energy Q1 2024
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